Your comprehensive guide to building your dream home with a One-Time Close New Construction loan. Get answers to common questions about unique properties, build timelines, and financing options.
Unique Property Options
Barndominiums
Eligibility follows Conventional/VA guidelines and depends on comparable properties in the area.
Custom Amenities
Build with pools, ADUs, or detached garages. Financing depends on appraisal and comparables. Excess costs may require additional payment at closing.
Financing and Payments
Contingency Funds
You will be required to have a percentage of the total build cost in reserves for cost overruns. These funds will be included into the down payment/equity funds prior to closing.
Down Payments
Your down payment requirement will be a percentage of the total acquisition cost minus any equity or credits assuming acquisition is less than the "after-completed" appraised value.
Initial Draw
These are the funds that will be disbursed to the builder to finance up front costs such as permits, foundation, septic, etc.
Builder Credits
Deducted from initial draw, any credits must comply with maximum interested party contribution limits.
Build Timeline and Extensions
Regular Inspections
The lender conducts virtual inspections and permit checks before each draw to catch issues early.
Extended Timelines
If build exceeds 11 months, the lender works with the builder to get back on schedule.
Document Updates
The borrower will only need to update their income, asset and appraisal documentation if the modification agreement is not signed within 12 months of initial construction loan closing.
Land and Existing Structures
Existing Dwellings
Land with existing dwellings is ineligible. Parceling off part of the land is required for new builds.
Demolition
Demolishing existing homes is allowed. Existing foundations can be used for conventional loans, but not for VA loans.
Financing Demolition
Demolition costs can be added to the project budget, subject to appraisal and LTV limits.
Manufactured Homes
Choose Your Home!
Work with a manufactured home dealer to find and customize your perfect future home!
Find Your Land!
If you don't already own your land, then find the perfect spot to place your new home!
Facilitation!
Work with your lending, manufacturing team and builder to make the dream come true!
Specific Questions?
Can I build a new home on land that already has a single-family dwelling on the property?
Land with an existing dwelling is ineligible for a One-Time Close New Construction transaction. To proceed with an OTC New Construction transaction the borrower would need to parcel off part of the land to allow for the new build.
Can I demolish an existing single-family home and use OTC New Construction to build a new home on the land?
Yes. The existing homes foundation can be used for the new build if it is within local code for the proposed new home. This is only eligible on conventional transactions. On VA loans, the existing foundation cannot be re-used, and the appraisal completed cannot show that anything beyond the completion of the foundation.
On a VA Loan, how do the interest-only payments work if the builder is paying for them during the construction period?
The lender will hold the interest-only funds that are included in the builder's budget on behalf of the builder in an escrow account. The interest-only payment will be paid when due. The borrower will receive a monthly statement each month showing the interest payment being made for the prior month.
Can I set up an escrow holdback in case the build of the property is stalled due to seasonal weather changes or things like that?
There are no escrow holdbacks allowed on Conventional or VA loans. The builders in the area should understand the changing weather and the possible challenges that come with it. When the builder submits their project for review, they factor in if any of the build time falls into a time where it is more difficult to do exterior building. Many brokers design their building plans to have the exterior done during the good weather months and finish the interior during the poor weather months. Any funds the builder thinks they will need to complete the project during any season should be included in the cost and submitted with their project plan.
Are owner builders (meaning the borrower is the builder) allowed?
Owner builders are allowed on conventional loans only. The borrower/builder must get builder approval. The budget will have significant contingencies added to mitigate risk meaning the borrower/builder will have to qualify at a higher payment, come in with a higher down payment, and have higher equity. The borrower/builder must provide an LOX stating its their primary residence and there is no intention to sell the home or have spec home use.
Can a borrower who already started building their own home, transition into an OTC loan?
Yes, this would be considered financing a Pre-Started loan. The one thing to keep in mind when the pre-start is done by an individual is the broker and borrower will still need to supply invoices, permits and supporting documents for the build already done. The lender will also need to send an inspector out to the property to make sure everything started is up to code before they approve the new project from the new builder. We will not be able to finance the individual completing their own build unless they are a licensed builder. Conventional loans only.
Can borrowers get reimbursed for materials they purchased outside of the loan transaction for the new build? For example, if the borrower bought windows they really wanted and gave them to the builder to install during construction.
If borrowers purchased anything for the home outside of closing, they cannot be reimbursed with cash in hand, however they can get equity credit for those purchases. Meaning, if a borrower bought $10,000 worth of windows for their new home and gave those to the builder to install, we would count the $10,000 as money the borrower put down on the home, which would reduce their cash to close. They wouldn't be paid back $10,000 at closing.
Can borrowers use future rental income from the subject property or a primary conversion to qualify on a One-Time Close New Construction loan?
No, future rental income cannot be used to qualify. Since the borrower is responsible for making mortgage payments while the property is still under construction, and they will not have the ability to rent out the property and obtain rental income until after construction is complete and the loan is converted, using future rental income is not acceptable.
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Do you have questions or a scenario you wish to discuss before proceeding?
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OTC Additional Info